CalSTRS won’t be enough for your retirement and I know that sounds harsh. While having a pension can bring a sense of comfort, teachers must resist this false sense of security. Relying on your teacher’s retirement pension alone might be harmful to your financial health.
According to the California Teachers Association website CTAinvest.org “the median CalSTRS pension replaced less than 60% of the final salary.” Granted, your expenses will likely be lower in retirement, but that can difficult to know for certain. If you accept that 60% of your final pay won’t cut it, where will you make up the shortfall?
CalSTRS and Social Security for teachers:
CalSTRS began in 1913 and is not only the largest teacher’s pension fund in the US, but it’s the twelfth largest public pension fund in the world (Pension360.org). According to the CalSTRS website, in 1913 the initial teacher contribution to the fund was $12 per year and the annual pension benefit was $500 per year! Obviously, a lot has changed since then. Now, the pension benefit is calculated by Service Credit x Age Factor x Final Compensation = Benefit. The CalSTRS site has tools for members and calculators for your specific situation. I highly recommended giving that page a visit.
What can complicate things for teachers is Social Security and how their benefits will be affected by participating in CalSTRS. There are two main rules that can impact teachers when it comes to Social Security: Windfall Elimination Provision (WEP) and the Government Pension Offset (GPO). It is important to get familiar with these rules and Social Security Intelligence is a great resource for this. The main takeaway here is that your Social Security statement will not reflect the reduction in benefits so it can be misleading.
Making up the shortfall from CalSTRS:
Let’s get back to the original question, where will you make up the shortfall between CalSTRS and reduced (if not eliminated) Social Security benefits? The answer is that it’s all on you!
403(b): As a teacher, you’re probably familiar with the term 403(b). They’ve also gone by the name Tax Sheltered Annuity or TSA. But nowadays, that is a misnomer because there are investment options available other than annuities. 403(b) plans allow you to defer some of your salary (pre-tax) and invest in mutual funds or annuities to supplement your retirement income in the future.
457: Some teachers are also eligible to contribute to 457 plans. These are very similar to 403(b) plans but there are some differences. The main differences center on how and when you can access the funds.
Both of these plans allow you to contribute to an investment account on a pre-tax basis which reduces your annual income tax bill. However, the funds become taxable upon withdrawal in retirement. Both of these accounts are powerful retirement savings vehicles and for the uber saver, you can contribute to both which means you can double the amount.
As an example, in 2016 the annual limit for a 403(b) and 457 is $18,000 for those under age 50. If you are eligible for both plans, you could contribute up to $36,000 per year! Yes, that is a tall order, but there are folks out there taking advantage of this.
Roth IRA: What many people fail to consider is the amount to which retirement funds will be taxable upon withdrawal in retirement. When you begin withdrawals from 403(b) and 457 plans, the withdrawals are taxable as ordinary income. Without getting too stuck in the tax weeds, money taken from these accounts won’t go as far as you think due to taxes.
This is where Roth IRAs come in. Roth IRAs are funded with after-tax dollars and when used in retirement, the withdrawals are tax free. In the video below, I discuss the importance of Roth IRAs but for more information, you can view my article Roth IRAs: 5 Things Retirement Savers Must Know
CalSTRS is an excellent program and this pension for California teachers plays a critical part in their financial security. But it’s not enough. It is up to you to make up the shortfall by investing in your 403(b), 457, and Roth IRA. These retirement accounts aren’t the only option, but they deserve a closer look.
Wherever you decide to invest, discipline and consistency is the key. Saving for retirement is hard, but like they say “nothing worthwhile is easy.” A secure retirement is most certainly a worthy endeavor.
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